Finding alpha has become like mining for gold, but it’s not because the investment world is lacking skill. There are just way too many highly skilled hedge fund managers competing for the alpha, writes Josh Brown.
The top 11% of hedge fund managers controlled a massive 92% of total hedge fund assets at the end of the first quarter, CIO Magazine wrote Wednesday. These top 570 managers, which held $2.78 trillion in assets total, had at least $1 billion in assets each. Of those, 22 managers held $20 billion or more.
Age may be an advantage for the big dogs, writes Brown in his latest blog post for The Reformed Broker. Hedge funds founded in the 1990’s probably only had about 100 serious competitors reaching for alpha. Many of the “vintage” fund firms are still building on their returns from the good old days when “alpha was everywhere you looked,” says Brown. Compound those initial returns at 20% for 10 years and then just hit a market return for another 10 years and the fund’s time-weighted returns still look awesome. No one is really looking at, or wants to look at, the dollar-weighted returns that will show performance based on how much was invested and when to see how much money was really made, says Brown.
“Barring some sort of extreme event where the best traders on earth are abducted by flying saucers while all of the top hedge funds instantly have their assets cut in half – a return to the 1985-2005 era of sustained, bountiful, uncorrelated outperformance for everyone is highly unlikely,” writes Brown.
It’s not that hedge fund managers have lost their skill, Brown assures. It’s just that there are too many highly skilled managers for the market to handle, making alpha more rare, especially the amount of alpha worth paying high fees for.
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